China’s buying of U.S. debt is so murky, even the U.S. doesn’t know exactly how much Beijing owns.
Each month, the Treasury Department releases its Treasury International Capital report detailing data on capital flows across U.S. borders. That report attempts to tally transactions and foreign ownership of U.S. debt and other assets. It gives Treasury a rough picture, gleaned from reports it receives from banks and other financial houses on a monthly and annual basis.
But it’s still just an educated guess, given that not every financial institution around the world, including China’s own People’s Bank of China, fesses up to all the details of its transactions.
Take, for example, June data published Friday. If you add China’s $372 million in net purchases of Treasury bills from one table (column 9) to its $23.6 billion in net buying of bonds and notes in Treasury’s long-term table, it appears Beijing added a net $24 billion to its portfolio.
But Treasury’s table for the holdings of major foreign holders shows a net reduction in China’s portfolio of $2.5 billion.
So which is it: Did China add $24 billion on cut its holdings by $2.5 billion? Treasury doesn’t know for sure.
“It is possible to estimate monthly holdings of securities by combining the transactions data with the annual holdings data to estimate of monthly holdings of securities…but users should be aware of the difficulties, particularly in regard to country attribution, associated with this methodology,” the department says in its FAQ on the data.
Part of the problem is that some of the data is based on transactions, but doesn’t take into account trades that some institutions do on behalf of other countries. The Major Foreign Holders table is supposed to take into account such proxy trades, reassigning transactions to the appropriate nations.
But not everybody’s abides by Treasury’s requests.
Belgium’s Euro Clear handles buying and selling of U.S. Treasurys on behalf of governments around the world, but isn’t legally bound to tell the U.S. Treasury Department the details of those trades. That’s why the tiny country, according to Treasury’s data, is the third largest holder of U.S. debt. (It’s also why the Caribbean banking centers, known for their secrecy, are the fourth-largest holders.)
Coincidentally, Belgium’s ballooning purchases roughly match the period when the U.S. Treasury says Beijing was buying major volumes of foreign exchange, including U.S. debt, to keep a lid on the value of its own currency and ensure its exports remained competitive in the global market.
According to the Major Foreign Holders table China’s portfolio holdings of U.S. debt were relatively flat over that period.
The Major Foreign Holders table is also supposed to reflect changes in the value of the holdings based on fluctuating currency values. But those currency movements aren’t nearly large enough to account for the inconsistencies between tables.
The lack of clarity is one of the reasons U.S. Treasury Secretary Jacob Lew counted a promise by Beijing to be more transparent about its foreign-exchange operations a small triumph at the high-level U.S.-China talks last month.
Beijng left itself a loophole, however. It didn’t offer a timeline.
So until China is more transparent about its transactions, or Treasury is able to get all major financial institutions to give full reports, it’s unlikely we’ll know exactly how much China owns.